This is a question I often hear from investors. In today’s super-low interest rate environment, CDs are no longer considered an investment and virtually guarantee an after-inflation, after-tax loss. Fortunately, there are alternatives.
Before discussing where to invest, it is important to discuss time horizons. If you need the money within a year then you should just keep the funds safely invested in a money market fund. You won’t receive much income but the money is safe and liquid.
If, however, you have a holding period of a couple years or more then the money can be invested in exchange-traded debt and equities. For fixed income, my largest holding in client accounts is HSBC Adjustable Rate Series D Preferred.
This investment grade security is tied to the Treasury market, which is far more attractive than other adjustable securities that are tied to Libor. It currently pays 4.5 percent and its dividend will increase when long-term Treasury rates rise about 1.5 percent from here.
The strength in re-insurers’ stock prices show they are insulated from rising rates. Looking at their preferred stocks, I like Renaissance Re Preferred E, which is an investment-grade preferred that pays qualified dividends and yields 7.2 percent. Partner Re Preferred D is also investment grade and yields 7.1 percent.
Readers of this column know that income investors should also own dividend-paying stocks. They offer both growth potential and income. BP Plc (BP), which yields 4.9 percent, is an especially good holding.
Spectra Energy (SE), which will raise its dividend in the first quarter, benefits from our increasing demand for natural gas and yields 3.6 percent. Alternatively, a dividend paying ETF like Schwab Dividend Equity (SCHD), with its 2.5 percent yield, is a good choice.
With short-term income vehicles yielding next to nothing, it remains a TINA environment for stock investors. That is, There Is No Alternative. Sitting in money market instruments doesn’t pay off.
Investors in need of income should hold some selected fixed-income instruments and stable dividend paying (and raising) stocks and ETFs. That’s how I invest in most client accounts.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.